The Road Ahead: Insights and Strategies from Wildhorn Capital
This time of year there always tends to be a flurry of predictions of what’s to come in the New Year. Questions about the economy, interest rates, and the housing market are on everyone’s minds. At Wildhorn, we’re no exception to this trend. The last few weeks of the year are a whirlwind of performance evaluations and preparations for the upcoming year. Amidst all this, we also take time to delve into the forecasts and predictions that have popped up in the news. It all has an impact on how we view the landscape heading into the New Year.
In today’s piece, we’ll share our outlook and plans for 2024. We’ll also be shedding light on the 2024 multifamily market headlines and noteworthy developments that are sparking conversations around our office and molding our strategic direction for the coming year.
2024 Multifamily Market Headlines
Evaluating The Central Texas Apartment Supply
You may have read that in the Central Texas region we’re gearing up for an influx of supply – those 2024 multifamily market headlines aren’t wrong. Austin and San Antonio are set to welcome a whopping 38,329 and 14,983 new units, respectively, over the next 12 months. The bump in supply has set off some alarm bells in the industry, and we expect those deliveries will continue to put some pressure on rents and occupancy as they come online.
As alarming as those numbers could be (especially the Austin figure), there is a lot of nuance to sort through. That nuance will impact the market, and certainly how we are thinking about acquisitions.
First off, we think those headline figures are somewhat overstated. There are typically three categories of projects included in the supply pipeline: those are “planned”, “started” and “in-lease up”. Over the past year, we’ve heard and seen an overwhelming majority of anything “planned” being shelved. Thus far, we’ve seen multifamily permits dip by 27% in Austin and a staggering 47% in San Antonio when comparing 2023 to 2022. There are a few reasons this is happening, and the most common are, “project not economically feasible at this time” and “inability to secure construction financing”, according to a recent National Multifamily Housing Council (NMHC) survey.
Looking beyond the next 12-18 months, we predict the dip in project starts will create a void in the market in the second half of 2025 and 2026. The market will have absorbed all of the units being built, and we’ll be in a situation where demand outstrips supply.
Amongst the units that are moving forward and have started, we don’t think all of those are likely to deliver in the next 12 months. Most of that will be caused by delays from City Inspections or waiting on electric meters. Whatever the cause, those delays will stretch out the timeline for the delivery of units which will help alleviate some of the immediate pressure the market feels.
The final nuance we pay attention to is the location of the units being built, harkening back to the old real estate adage: “location, location, location.” The majority of the units that are being built tend to be located in close proximity to each other in specific submarkets. Austin and San Antonio MSA’s are huge, so diving deep on submarkets is important to do. For example, Liberty Hill (a hot submarket for development located at the extreme Northwest side of Austin) is 55-miles from Kyle, which is on the south side of town. We spend a lot of time looking at where units are being built, and focus our acquisition efforts on in-fill locations that will likely be less directly impacted by immediate supply.
We enter 2024 anticipating that rents across our markets will remain flat–and may even contract compared to the last 12-18 months. The market will need time to absorb all the units that are being built (whether they deliver in 9 months or 19 months). But we don’t sit here today feeling afraid to pull the trigger on an acquisition that makes sense due to a short-term oversupply issue.
(Interest in) Acquisitions Will Pick Up Steam This Year
The obvious economic story from 2023 (at least from a real estate perspective) was the escalation of interest rates–and the impact those rates had on both new acquisitions and existing floating rate notes.
As we enter 2024 it appears that interest rates have leveled off–and if you track the treasury markets you saw them retreat in December. With the Fed signaling they are done raising rates (and biding their time until they start to lower them), the acquisitions market should rebound. Yes, rates are higher today than they were 2 years ago. But what the market has needed has been rate stability. With stable rates, you can more confidently underwrite acquisitions, not having to account for so much unknown volatility in the future.
In 2023, acquisitions were very slow across the multifamily industry. Frankly, even the interest in trying to make an acquisition was low. Sellers still had high expectations for pricing, not willing to let go of the figures that were whispered in their ears just a year prior. Buyers couldn’t predict where interest rates were going, and had to be very defensive in their underwriting. As the year went on, the bid-ask spread narrowed, which signaled sellers were adjusting their expectations and buyers tightening up a few of their assumptions. With more stable interest rates, we predict acquisition activity will pick up in 2024.
Debt Maturities and Floating Rate Loans Will Create Distressed Opportunities
A recent advisory from the FDIC lumped Multifamily in with Office as potentially high-risk sectors for the banking industry. While that may be a fair assessment, the reasons they are listed as high-risk are for very different reasons. Office is facing a moment of crisis, as companies everywhere are still wrestling with the question of what the “future of work” looks like, and how much (if any) office space they want or need. Multifamily is not facing that sort of crisis. The nation still faces a shortage of housing units for our growing population–and people still need a roof over their head.
The Office and Multifamily sectors do exhibit similarities in this market. The interest rate hike has created a notable increase in financial strain on multifamily and office assets that were previously funded with floating rate debt. This had led to higher loan payments and additional rate cap expenses. Newmark shows that $96 billion of multifamily loans will mature in 2024. The owners of those assets will either need to refinance, work with their lender to create an extension, or be forced to sell the asset.
For Wildhorn, we believe this could create some opportunities for acquisitions and will be active in pursuing these. Whether that involves providing (preferred) equity to step-in to a troubled deal or via a straight acquisition in a forced sale situation.
Central Texas Corridor Will Maintain Its Population Growth Trajectory
As we’ve often said in this space–the most important trends we pay attention to are population growth and job creation. They are inherently linked as the more jobs you create, the more people are attracted to your market. The bigger and better your population (also known as workforce), the more employers are attracted to your market. In this regard, Central Texas continues to flourish. While the data isn’t 100% complete, it appears that Central Texas is poised to end 2023 as the top creator of jobs in the country–again.
These are all good signs for our business and it supports our overarching business thesis: a long-term view on Central Texas housing is a winning strategy.
2023 was a challenging year for the multifamily industry at large. At Wildhorn, a boutique real estate investment firm, we’re proud of how we navigated last year and how we have positioned our current portfolio coming out of it. We don’t need to start the year playing defense. Our outlook and attitude for 2024 is to be offensive. That doesn’t mean being crazy aggressive, but it does mean focusing our energy on finding opportunities. We believe in our market–its long-term fundamentals and growth. We believe in our team. We believe we’re positioned to find great investment opportunities for our investors. And we plan to be offensive in our approach to doing just that.
Happy New Year.
A lifelong Austinite and UT graduate, Cooper has worked in a variety of roles in the commercial real estate space throughout his career in Central Texas. Most recently, Cooper served in a business development role for Heritage Title for over 9 years. His diverse background serving clients in a variety of roles is an ideal fit for his position at Wildhorn Capital, where he manages the company’s capital relationships and focuses on deal sourcing in Austin.
